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Wednesday, December 28, 2011

Markdown Pricing - Necessary Evil in Retail


Markdowns are often associated with margin degradation and profit loss. Although inevitable, retailers have historically viewed markdowns as a necessary evil designed to help sell old or slow-moving inventory. Retailers typically leverage markdowns to get rid of leftover inventory at the end of a season. Even though selling products at lower prices means a decrease in margin for the business, it leads to increased foot traffic in stores.


Here are some Markdown terminologies for a better understanding

  • Markdown - A reduction from the original or previous retail price of merchandise
  • Markdown Money - Money obtained from manufacturers to cover lost gross margin dollars, which result from markdowns that occur late in the season.
  • Permanent Markdown - A reduction in the retail price of merchandise to clear the merchandise from inventory.
  • Temporary Markdown - A reduction in retail price for a specified period, usually short term, with the intent that the merchandise will ultimately be repriced
There are two major types of Markdown retailers regularly use
1. Flat Markdown- Usually a one level markdown applicable under following scenarios
a - EOSS - End of Season sale
b - Size Markdown - for Non selling sizes
c - Defective products- Usually in apparel where there is a color mismatch, wrong style, pockets in wrong place, irrepairable designs on Embroidery or Patches, irregular sizes, improper wash handfeel
d - Near expiry products like Grocery, Perishables and Dairy foods

2. Phased Markdown - applicable to products which have short shelf life with high seasonality especially apparel which have to make way for fresh merchandise to be replaced frequently

A Flat Markdown can be a temporary markdown or a permanent markdown where as a Phased markdown will always be a Permanent markdown

In a temporary markdown it is always easy to reverse the markdown price back to its original price when the temporary markdown is executed for a specific time period usually to drive traffic to stores especially during new store or product launches or any other significant instore events.

In a permanent markdown there is no price reversal untill all the stock is cleared. SKU's which go for a phased markdown are more likely to be delisted from the assortment by the retailer for the upcoming season especially when it s a Retailer's private label where margin erosion is high. If the retailer need to markdown an outright purchase Branded item then it is imperative he considers the Purchase price of that item as the retailer would have secured fantastic discounts on an outright purchase. So he need to make sure markdown margin should not eat into the purchase price of the item. Retailers also have clauses with suppliers for cost sharing arrangements or buyback contracts for non selling items.

Cheers
Spacedpractice.com



5 comments:

  1. I am a graduate student trying to understand the practice of markdown money a little more clearly. How do vendors negotiate the terms with the retailer and is the amount of money paid per item sold at a discount or a percentage of profit margins lost? Any information would be very helpful.

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  2. I am a graduate student currently doing research involving markdown allowances in retail. I am trying to understand more specifically how they work (how are the terms structured? when are things negotiated? how frequently are markdown allowances used?). I'd appreciate any information on the topic.

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  3. Hi...markdowns are more of an exit strategy where retailer ask vendor to contribute when the vendor supplied item does not give the expected sellthru.In fashion markdown contribution from vendor is usually considered as % of unit retail where as in Grocery.....vendor agrees for a fixed amount as markdown to be deducted from his payment invoice

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  4. Wonderful info. It is nice to see you express from the heart and your clearness on this vital topic can be simply observed.

    Dirk Kettlewell

    ReplyDelete